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Private GovernanceCreating Order in Economic and Social Life$
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Edward Peter Stringham

Print publication date: 2015

Print ISBN-13: 9780199365166

Published to Oxford Scholarship Online: August 2015

DOI: 10.1093/acprof:oso/9780199365166.001.0001

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Does Private Governance Work in the Most Complex Markets?

Does Private Governance Work in the Most Complex Markets?

Successful Risk Management on Wall Street Even in the Wake of the 2008 Economic Downturn

Chapter:
(p.165) chapter 11 Does Private Governance Work in the Most Complex Markets?
Source:
Private Governance
Author(s):

Edward Peter Stringham

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199365166.003.0011

Many advanced financial instruments are created because even the best courts are imperfect. Even if lenders cannot recover money from insolvent borrowers, default becomes less of a problem when default risk is accurately priced into interest rates or insured against using a credit default swap. Although many blame complex financial instruments such as credit default swaps for causing the 2008 economic downturn, this chapter makes the case that these instruments simply responded as designed to market conditions. Products designed to be safer were, and products designed to absorb losses did. Even in the midst of major credit events, private groups like the International Swaps and Derivatives Association helped ensure that most buyers of credit default swaps were paid what they were owed, and providers of third-party certification, administrator services, and custodian services helped secure investors’ property rights.

Keywords:   risk management, pooling default risk, pricing default risk, financial innovation, advanced derivative, third-party accounting, custodian service

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